How to Handle Guaranteed Pay Packages While Partners Are Hurting

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we look at how firms and partners can negotiate changes to guaranteed pay packages, which have become a thorny issue as firms seek to cut costs in a slowing economy. Sign up to receive this column in your Inbox every Thursday morning.

Law firms are asking partners to take a salary hit. But what do they do with partners they recently recruited with the help of a guaranteed pay package?

That’s a question plenty of law firms are discretely grappling with. Either a deal is a deal, and the new partner will make pre-coronavirus money while the rest of the partners tighten their belts. Or, it’s time for a negotiated solution.

The dilemma is indicative of the complex personnel pyramid at Big Law firms. It is also another example of how difficult it has been for firms to share the financial pain caused by the pandemic. Even summer associates are upset with how they’re being treated by some firms.

While firms use only a few titles to denote status, the true number of constituencies is far greater than associate, income partner, and equity partner. And in many cases, lateral partners and their salaries are a protected class for two-plus years after they are hired.

Pay guarantees got a lot of negative attention during the last economic downturn since they were associated with the bankruptcy of Dewey & LeBoeuf. And while firms learned some lessons from Dewey’s master class in guarantees-gone-wrong, the deals remain fairly commonplace in Big Law.

There are as many types of “guarantees” as creative lawyers can think to draft, according to interviews with multiple recruiters.

Some deals promise incoming partners a place in line on a firm’s tiered “point system.” At a firm where all the points are being adjusted downward, that is less of a problem in today’s environment.

But superstar lawyers often receive at least a minimum salary guarantee. Pay packages at the high end can be upwards of $10 million. Lowering that could require a complex conversation. And on the other end of the spectrum, partners without large books of business often receive fixed-sum guarantees hovering around $500,000. Again, there’s nothing automatic about that compensation adjustment.

“If firms are doing cuts across the board and they are going to play around with distributions, it’s kind of hard to rope off the people who just came in and who they made a promise to,” said Larry Watanabe, a West Coast recruiter for Big Law firms. “Politically, that could be really ugly.”

Kent Zimmermann, a consultant for law firms at Zeughauser Group, said many firms are taking a proactive stance and politely offering partners the chance to participate in the firm’s cost-saving salary cuts.

“The prevailing approach,” Zimmermann said, “has been to go to those partners and discretely say, ‘Listen, we are prepared to honor the deal. But given the degree to which your partners are being asked to tighten their belts, we feel it would be better if you were seen as being willing to share in that.’”

Recruiters are often viewed as trying to fight for every dollar for their candidates. But some recruiters said it would benefit laterals to be agreeable with firms that are requesting partners take cuts to their guarantees.

Mark Jungers, co-founder of law firm recruiting company Lippman Jungers, said one of his candidates was asked to renegotiate a deal leading up to a recent signing.

“It wasn’t quite as direct as: ‘We think the deal should change,’” Jungers said. “It was more like, ‘Under the current economic circumstances, should we take a fresh look at numbers?’”

Ultimately, the partner was amenable to a new figure, Jungers said, noting it was still a “good deal.”

Even in situations where a contract specifies a partner’s compensation, law firms may have leverage to make changes, said Tom Clay, a principal at consultancy Altman Weil.

“You can sue your current law firm, I suppose, but then what are you going to do?” Clay said. “Go to another law firm? You’d be anathema, absolutely anathema to another law firm.”

Parties may also need to determine whether partners who agree to salary cuts will be able to be made whole if the law firm’s finances turn around.

It remains to be seen how the market turmoil will impact guaranteed salary terms going forward. But plenty of recruiters expect they will remain common. Some said they are more important considering the amount of uncertainty in the market.

“I’m still doing guarantees,” said Kay Hoppe, a Chicago-based recruiter for Big Law firms. “Why would a partner take a chance?”

Worth Your Time

On Kirkland & Ellis: Kirkland & Ellis turned heads this week by hiring Wachtell M&A partner Edward Lee. The move solidifies a tried-and-true strategy for the firm that appears set to continue under its new leader, Jon Ballis, as my colleague Meghan Tribe and I reported.

On Future Partners: There may not be that many of them. Only 23% of the Gen Z respondents to a Major Lindsey & Africa survey said they had making partner in mind as a long-term career goal.

On Diversity: Seyfarth Shaw and a group of non-profits launchedThe Belonging Project to help diverse lawyers access skills training and job resources. The program is an effort to avoid the types of layoffs that occurred in 2008, which the project’s leader called a “nightmare” for diversity and inclusion efforts.

That’s it for this week. Thanks for reading and please send me your thoughts, critiques, and tips.